Tudor, Pickering, Holt & Co: Buy Petrobras, It's Worth $15/ADR

In a report published Wednesday, Tudor, Pickering, Holt & Co analyst Anish Kapadia upgrade the rating on Petroleo Brasileiro Petrobras SA PBR from Accumulate to Buy, with a price target of $15. "We expect Petrobras to come out of the other side of the Car Wash scandal in better shape, in particular as it will abandon the loss-making refinery projects and be able to freely set pump prices, eliminating some of the massive losses seen in the past. This should allow the market to focus on the key upstream positives: in particular its huge pre-salt resource," Kapadia explained. The analyst believes that the company has the best growth potential among the majors in the short and medium term, given that it owns some of the lowest cost oil resources in the world, as well as an unmatched large yet low cost resource base. In addition, the fiscal environment remains favorable. According to the Tudor, Pickering, Holt & Co, "Petrobras is the world's largest operator of deepwater facilities with more FPSO projects than any other company." The analyst also expressed his confidence regarding the company's pre-salt growth, adding that execution in this segment has been excellent to date. The analyst expects the company to be able to generate free cash flow worth $15 billion from pre-salt by 2020, while expecting the company's current strategy to focus on "maintaining a profitable downstream with control of pricing, measures to reduce debt (lower capex and more disposals) and improve leverage ratios, pre-salt growth from its core assets and trimming activity outside of this area." However, the analyst expects Petrobras' stock to trade at a slight discount to its peers, with the company's significantly superior growth being offset by risks.